- Listen to it on Apple Podcasts.
- Listen to it on Spotify.
- Listen to it on YouTube Music or YouTube
- Listen to it on Audible and Amazon Music
In this episode, my goal was to make it relevant for both types of listeners:
First, for those who are just getting started in do-it-yourself investing or are looking to transition to becoming passive index investors instead of trying to beat the market by stock picking or owning expensive actively managed funds.
We’re going to build a strong foundation for you here to help you get started, such as discussing what it actually means to be a total market index investor, and what the research says about passive index investing versus actively trying to pick investments that will beat the market. We’ll also talk about the different ways you can be a DIY passive index investor here in Canada and the pros and cons of each.
Next, we’re going to tackle something that’s a bit more intermediate level and something that I’ve personally been deliberating and have been curious about for quite some time: When it comes to the more stable, fixed-income portion of our investment portfolio (often called the bond portion), what are some of the options available to us here in Canada, and what are the pros and cons of each?
We’ve all heard of high-interest savings accounts, GICs, and all-in-one bond ETFs that capture the aggregate bond index and have an assortment of bond types in them. But what if we only want a specific type of bond in our portfolio because of the degree of volatility and income that it provides? What are these different types of bond ETFs that we can buy, and what’s the trade-off that we incur by choosing one over another?
In the past, we have had both stocks and bonds fall at the same time (2022), so what are our options and tradeoffs when it comes to specific types of bonds that we can choose, so that we can avoid or mitigate the large drops in the “safe/less volatile” portion of our portfolio?
Links from the Episode
ETF Comparison Tool. This is especially useful for comparing fees (the MER) among similar ETFs. At this link, I’ve already included some comparisons for you.
Here is the episode on fixed income choices that I mentioned during the episode: Fixed Income ETFs Episode
Investor Profile Questionnaire (to help you determine your asset allocation)
A Big Thanks to Our Sponsors:
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“Views from the Desk” Podcast
On this podcast, we often cover best practices that can not only help you now, but will also be relevant throughout your investment lifetime. But what if you also want an update on what is happening with your investments, the markets, and the economy right now?
To help me stay up-to-date on these topics, a great Canadian podcast that I listen to weekly is called “Views from the Desk” (Apple, Spotify, Direct).
They provide timely information for us Canadians on what is happening to our investments right now, as well as other key factors affecting us like changes to our interest rates, our inflation, and regulatory changes that we should know about.
The podcast is hosted by BMO ETFs. I’m a huge fan of theirs, I own a lot of BMO ETFs myself, and it’s a great free resource for both new and existing ETF investors.
I hope you check them out. All episodes are available for free in your favourite podcast player. Just search for “Views from the Desk” or click one of the links below:
ETF Market Insights and BMO ETFs
Catch the latest episodes on YouTube Here.
There are so many opinions on how to invest your money today, but it can be hard to find credible voices to rely on in the world of finance and investing.
One resource I turn to every week is the ETF Market Insights YouTube channel, led by today’s episode sponsor, BMO ETFs.
Market Insights brings in industry experts and their weekly episodes cover the hottest themes like inflation, infrastructure, healthcare, and more. Tuning in helps me stay up-to-date on what’s happening so I can be a smarter investor. You can also submit your own ETF questions, to be answered on the show.
Do yourself a favour and subscribe on YouTube to ETF Market Insights, or visit ETFMarketInsights.com so you can be notified when future episodes go live.
BMO Asset Allocation ETFs:
Asset allocation explains over 90 per cent of the variation in a portfolio’s quarterly returns, so it’s no wonder Canadian investors are turning to these ETFs!
Today’s sponsor, BMO ETFs, offers these innovative all-in-one solutions with the BMO All-Equity ETF (ZEQT), BMO Growth ETF (ZGRO), BMO Balanced ETF (ZBAL), BMO Conservative ETF (ZCON), and more. BMO developed these to help provide investors with ETFs that offer broad diversification and are also low-cost and simple to use.
These ETFs invest in a number of underlying index based ETFs and are rebalanced automatically back to your set asset allocation or mix of stocks and bonds. They offer a hands free approach to investing that is built on disciplined weights to provide exposure to different geographies and sectors all in one solution.
BMO actually offers eight asset allocation ETFs. Learn more at BMOETFs.com.
Questions Covered:
- To kick things off, before we get into the details on the different ways that us Canadians can structure our portfolios, just to be beginner friendly, can you take us through what it means to be a “total market, index investor” vs some of the other investing styles, and why do investors like myself and many of those listening use ETFs to invest in this way?
- Using ETFs to be a total market index investor is something that has been researched quite heavily for some time. Meanwhile, many of us are constantly pitched certain get-rich-quick strategies, or investments that claim to offer only upside at no risk. Can you take us through what the research actually says and why you and the team have decided to invest so heavily into this type of investing?
- Once someone decides that they want to be a total market index investor, one of the first dilemmas that inevitably comes up is whether they should buy an all-in-one ETF, like a ZEQT or a ZGRO for example, or whether they should buy the underlying ETFs that make up those all-in-one ETFs to potentially save a bit in fees and potentially gain some tax optimization.
Can you speak to the pros and cons of each of these approaches, and approximately how much can an investor save in fees by buying the underlying ETFs vs opting for the massive convenience that asset allocation ETFs bring to the table? - The other major dilemma that investors face when constructing or evaluating their portfolio is what mix of stocks vs fixed income they should use – the asset allocation. Personally, I have found this dilemma to not just be a challenge that new investors face, as I’ve been investing for decades at this point and I’m still often deliberating on whether I’m leaving too much money on the table by having too much in the fixed income category. What are some of the best tools, resources, or ways of thinking that you think can help investors figure this out?
- For anybody new to the all-in-one asset allocation ETFs, can you briefly explain how it all works in regard to finding your asset allocation, and then selecting the correct asset allocation ETF based on that?
- One pattern that I’ve noticed across the hundreds of experienced investors that I’ve spoken to over the years, is that during the accumulation phase/working-years, the question that many of them use to help them choose how much to have in equities vs fixed income is “What is the most that I can possibly have in stocks without panic selling the next time that we have a major recession?”.
Many of them, being experienced investors who understand the markets and how cyclical they can be, therefore go with something like an all stock portfolio such as ZEQT, because historically, that type of allocation has the highest expected return over the long run. I also fit into this camp almost entirely. However, are there any other major considerations that you can think of when it comes to this other than the “How much of a decline can I psychologically handle?” test. - Once an investor reaches financial independence and is ready to transition to either full retirement or semi-retirement, I’ve noticed that a shift occurs where it’s no longer just about how much we can psychologically handle the declines, but it’s also about the cashflow that we have available, now that we are living off our portfolio.
To give a real life example, now that we’re at the stage of our lives where we are living off our portfolio, I personally feel uneasy about having nothing in that fixed income bucket, because I don’t want to sell any of my equities to buy groceries when the markets are down 40% for example.
And so, one way that I’ve started thinking about asset allocation in retirement, is to think of the fixed income bucket as the cash reserves that I have ready to deploy when the markets take a major hit. I can essentially sell a portion of those to pay the bills, so that I don’t have to sell any equities when they are down.
What I’ve personally been doing is holding something like a ZEQT or its underlying ETFs (or its equivalent of that) for the stock portion of my portfolio, and then picking a fixed income ETF that I feel comfortable with for the safer, less volatile portion of my portfolio.
The one I’m using now is ZST, which is the ultra short term bond ETF. The other one at the top of my list if I wanted something even less risky is ZMMK, which is the money market fund (it’s the one I’ve been using with my parents). But, I realize that there are many other types of bond ETFs out there, and I find myself wondering if maybe there is one that is an even better fit for me. For example, should I go with a short term, or medium term bond ETF instead?
Can you give us a bit of a primer on what some of the other major ETF options are in this fixed income bucket, and how differently they behave in different environments so that we can better find one that is a good fit for us? - I wanted to quickly ask you about ZEQT in particular because I do own a fair bit of it myself, and I’ve noticed when tracking its performance that it does sometimes behave a bit differently than its competing ETF from iShares for example. For instance, on some days it might be slightly up while iShares is slightly down, or vice versa. It is not by a lot, but I can see some investors wondering why there is a difference when both are trying to buy the market as a whole. I assume it has to do with the slightly different weights that you and they use?
- While we are on the subject of what is inside these asset allocation ETFs, during our interview prep, you mentioned the importance of doing your due diligence to understand what the ETFs you are considering buying actually hold. Can you speak to this along with some good practical ways that we can do this due diligence ourselves?
- Thank you so much for coming on. Can you tell us where investors can see more educational resources from you and your team?
Disclaimer:
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